March 11, 2020 06:56:28
The Reserve Bank of Australia knows part of its job is to keep confidence high.
If people are confident they’re more likely to spend more, and their spending will boost activity and create a feedback loop of growth.
During an economic crisis, the need to inspire confidence becomes paramount.
But in crisis management theory, one of the most important things a leader can do during a crisis is be honest about the situation.
And trust is critical. Evidence shows people are likelier to listen to a leader if they trust them. They’re also more willing to make sacrifices for the common good.
It’s a conundrum for political leaders.
Today, the coronavirus continues to spread in Australia and fears of a recession mount.
Prime Minister Scott Morrison — expected to announce economic stimulus measures later this week — on Tuesday implored a business audience in Sydney to become patriotic, to sacrifice for team Australia.
“Whatever you thought 2020 was going to be about, think again,” Mr Morrison said.
“We now have one goal together this year: to protect the health, the wellbeing, and livelihoods of Australians through this global crisis, and to ensure that when the recovery comes — and it will — we are well-positioned to bounce back strongly on the other side.”
“We need you to support your workers by keeping them employed. Hold on to your people, because you will need them on the bounce back on the other side.”
China can’t cushion the blow like during GFC: Morrison
He also wanted people to recognise how tough things were going to be for his Government, in comparison to what the Rudd government faced during the GFC.
“COVID-19 is a global health crisis, but it will also have very real and very significant economic impacts, potentially greater than the global financial crisis, especially for Australia,” he said.
“The epicentre of this crisis, as opposed to that one, is much closer to home.”
“The GFC impacts were centred on the North Atlantic, and back then China was in a position to cushion the blow for Australia.”
He then argued that Australia’s economy was in good health last year, before the fires and coronavirus.
He said employment growth was strong, there had been tax cuts for individuals and businesses, there had been billions of dollars in infrastructure spending, low interest rates, strong trade, rising house prices, and a pick-up in growth from 1.8 per cent to 2.2 per cent.
Internationally, he said the US-China trade war had simmered down, the prospects for an orderly Brexit had risen, and there were early positive signs of manufacturing activity and trade improvements.
“In short, we were heading into 2020 with growing domestic and international momentum out of last year,” he said.
For evidence, he cited RBA governor Philip Lowe, who said in September last year that Australia’s economy seemed to have reached a “gentle turning point” after a soft patch in 2018.
Why some economists don’t see a rosy picture
However, more than a few economists say the state of the economy was not that rosy heading into this crisis.
They point to other statistics, like the unemployment rate. It has been rising — from 4.9 per cent to 5.3 per cent — since February last year.
They say households have not been feeling confident, with incomes stagnating. Since the 2014 September quarter, the average real disposable income of Australia’s households has slipped backwards, from $50,325 to $50,063.
They say household consumption — which makes up 56 per cent of the economy — has been on a downhill slide since the 2018 March quarter, when it was growing at 3 per cent. By the December quarter, consumption growth had fallen to a paltry annual 1.2 per cent.
Retail sales tell a similar story. Despite last year’s tax cuts, retails sales contracted over December and January, by 0.7 per cent and 0.3 per cent — the first time since mid-2017 that retail sales have dropped for two consecutive months.
“Consumption started to sputter even before the coronavirus started to spread in Australia in earnest,” Ben Udy from Capital Economics said.
“We think that the widespread weakness in activity will weigh on the labour market and cause the unemployment rate to surge to 5.7 per cent before long.”
June quarter data to expose just how fragile we are
Westpac chief economist Bill Evans warned this week that the economy was already weak before the coronavirus outbreak.
“The economy will be dealing with the impact of the virus when it is in a relatively fragile state with growth in 2019 at 2.2 per cent compared to potential of 2.75 per cent,” he wrote.
“In particular, consumer spending has been insipid, with the annualised pace running at only 1 per cent in the second half of 2020. This means that consumer spending is likely to be less resilient to shocks than if momentum had been robust.”
He said the economy’s pre-existing fragility would reveal itself in the June quarter data.
“Whereas exports (tourism; foreign students; agriculture; resources) and inventories (disrupted supply chains) will explain the major shocks in the March quarter given their exposure to the Chinese economy, the June quarter contraction will be dominated by Australia’s and the rest of the world’s exposure to the virus and the lagged effect of China’s recession in the March quarter,” he said.
So why would the Government want people to think that the economy will be more resilient during this crisis than the data may suggest?
In 1936, the British economist John Maynard Keynes coined the term “animal spirits” to describe how people make financial decisions, including panic-selling and buying, during bouts of severe economic uncertainty.
He believed household and business confidence could spur or hamper economic activity, and he was right.
For the rest of the 20th century, economists increasingly came to understand how profoundly important confidence was for economic activity, and central banks assumed the role of confidence whisperers.
Some governments have tried to behave similarly. Can they succeed?
March 11, 2020 06:05:30